Why is Title Insurance Important?

Your home may be new to you, but every property has a history. And, in some cases, that history may include title issues that, if not identified and addressed, can be used to challenge your property ownership rights. You don't want a problem that occurred long before you bought your property to deprive you of ownership or your right to use or sell it. And you don't want to pay the potentially high cost of defending your property rights in court.

A title search by a title professional can help uncover title defects tied to your property. And, subject to the terms of the policy, your title insurer may provide you with protection from title problems discovered after you close your transaction. Common title issues include errors in public records, unknown liens, illegal deeds, missing heirs, forgeries, unknown easements or an undiscovered will. These and other common title issues are often covered by an owner's policy of title insurance.

The process of insuring a transaction begins with a title search to discover and address potential title issues. However, some title defects simply cannot be discovered with 100% certainty. The job of title insurance is to provide coverage for losses due to the risk of uncertainty inherent in any chain of title. An owner's policy of title insurance is your best protection against potential defects that can impact or interfere with your rights as the property owner. A loan policy of title insurance also exists to protect your mortgage lender's interest.

For a one-time premium, First American will issue an owner's policy protecting against covered losses. These potential title issues or defects could include a forgery – even one that occurred 50 years ago – or a deed executed under duress, an unknown spouse's interest, an error by a clerk in the county recorder's office, or even a misapplied tax payment, to name a few. There are actually more than 70 ways you could lose your property due to a title issue. Your First American title insurance policy also provides for legal defense costs for as long as you or your heirs own the property unless the matter is excluded or excepted.

Many people are surprised to learn they are required to purchase a new lender's policy of title insurance when refinancing their mortgage. This is because a lender's policy only provides coverage for the life of a loan. When a home is refinanced, the life of one loan ends and another begins, so a new lender's policy is required. Because an owner's title policy generally provides coverage for as long as you or your heirs hold an interest in the property, there is usually no need to purchase a new owner's policy when refinancing (although you may want to purchase additional coverage to reflect an increase in your home's value, for example).

A lien is a legal right of a creditor in a piece of property to secure an obligation, usually the payment of a debt. Lien creditors could include mortgage lenders, a government taxing authority, or someone who has obtained a money judgment in a lawsuit against a property owner. If these creditors are not paid, the lien gives them the right to foreclose or force a sale of the property to satisfy the unpaid debt.

When you purchase title insurance, title professionals will conduct a public records search to identify and remedy, if possible, any issues or "clouds," so a policy of title insurance can be issued to protect your right to own or enjoy your property. A title search is typically performed by a title professional, such as an abstractor or attorney, and is a complex process, one that few homeowners recognize at the time they purchase their home.

An in-depth title search is generally comprised of a thorough examination of public records, usually starting at the local courthouse or recorder's office. The title search helps establish a "chain of title," which is the record of everyone that has held title to, or owned, a home or other specific property over time. Each change in ownership from one owner to the next is a separate "link" in the chain, from the past up to the present day.

Establishing a chain of title often requires considerable expertise. The steps required also vary tremendously by jurisdiction. The title professional may need to search several different public offices, look through multiple filing systems, each with its own "index," and compile many different types of records into a coherent narrative of the property's legal history while flagging any potential problems along the way.

Finding liens is an important part of searching title. This can be difficult because, depending on the jurisdiction, liens and judgments on a property may be filed a number of different ways (by the name of the buyer, the name of owner, the street address, lot number, etc.) and in a number of different filing locations.

In addition, in some states certain types of liens may attach to title even before they are publicly recorded. A good example is a mechanic's lien, which in some states can be enforceable even if it did not appear in public records.

These kinds of unknown and other "hidden" liens are a common title issue that impact a homeowner's right to use their property. Prior owners of a property may not have been meticulous bookkeepers—or bill payers. And even though a previous owner's former debt is not your own, banks or other financing companies can place liens on your property for unpaid debts, even after you have closed on the purchase. This is an especially worrisome issue with distressed properties.

Because it is a highly regulated industry, title insurance policy types and costs will vary from state to state. In many states, the Department of Insurance can provide more information on pricing regulations. In general, each policy price is based on the purchase amount of the home (for an owner's policy) or the total amount of the loan (for a loan policy). A large piece of the one-time premium paid for an owner's title insurance policy goes to fund the title search and additional legwork required to thoroughly research the property's title. Unlike other types of insurance, the purchase of an owner's title insurance policy is a one-time event; there are no future premiums to pay as long as you or your heirs hold an interest in the property.

Purchasing an owner's policy of title insurance is optional, though it is highly recommended and nearly all home buyers – Nearly 70% of all buyers choose to protect their investment by purchasing an owner's title insurance policy.

Attorney opinion letters carry considerably more risk for a home buyer than a traditional title insurance policy and may wind up costing consumers far more money. For example, attorney opinion letters typically offer no duty to defend. This lack of this protection could be harmful to low- and moderate-income borrowers, for whom attorney opinion letters have been promoted as a cheaper alternative but who are generally the least likely to be able to bear the costs associated with defending title should an issue arise. Paying thousands of dollars in legal fees out of their own pocket to protect their ownership rights could very well be financially devastating or nearly impossible for some homeowners.

Importantly, an attorney opinion letter may not disclose or protect home buyers against problems, like fraudulent deeds, improperly recorded documents, mechanics' liens or HOA liens. And, if a title issue does come up, the property owner may have to prove negligence against the attorney that provided the opinion – which may be difficult and costly to prove especially as the attorney is likely to be defended by a malpractice insurance company's lawyers. Moreover, even if found liable for negligence, the attorney may not have malpractice insurance to cover the loss, or the amount of coverage may be less than the property owner's losses, potentially leaving the owner uncompensated for some or all of their damages. On the other hand, title insurance companies, like First American Title, have substantial monetary reserves to ensure that covered losses can be paid.

On the other hand, a relatively small, one-time investment in title insurance provides the protection from covered title issues for as long as you own your home and the coverage includes the duty to defend, meaning the title insurer will hire lawyers and pay your defense costs should a covered title problem arise.